Analysis of business innovation potential

ABSTRACT

A method of determining a business&#39;s innovation capability consists of using a computer and internet based system which has a questionnaire program to obtain answers relating to 6 foundation capabilities and 6 innovation capabilities which are weighted and transformed by an algorithm into a value index which is used by management to improve innovation performance and by management and investors to forecast future growth and profitability of the business.

[0001] This invention relates to a method of determining a measure of abusiness's potential for innovation as an aid to business management andas a measure of a business's potential to achieve a high return oninvestment from the business.

BACKGROUND TO THE INVENTION

[0002] Analysis of business risk and predicting the likelihood of abusiness performing in the future are difficult tasks that areincreasingly in demand by investors and business managers.

[0003] WO98/20438 discloses a needs analysis computer system whichconsists of a program providing questions with yes no answers, a programproviding appropriate responses to the answers and means to select adegree of importance of each response the selections being stored inmemory and an output of proposed actions being provided at theconclusion of the program. This program is suitable for small businessassistance but does not predict future performance.

[0004] WO0011671 discloses a system of matching entrepeneurs withinvestors using a communication network and includes data to enableinvestors to assess the entrepeneur.

[0005] WO0034911 discloses a system for depicting the effect of businessdecisions on market value. The system classifies assets into tangibleand intangible asset categories and models market value as a function ofthese categories.

[0006] WO0068861 discloses a benchmarking analysis system in which abenchmark provider receives appropriate data from number of suppliersand then the data is analyzed on a weighted basis keyed to the suppliersstatus in the industry and then compared to the industry averages. Thesupply of the data and the benchmark report at regular intervals aidsbusiness decision making.

[0007] WO0073945 discloses a method for making a loan based on anintangible asset such as intellectual property. This enables a lender toassess the value and liquidity of the intangible asset.

[0008] These recent developments do touch on the importance ofintellectual capital but do not measure the performance of the processthat produces intellectual capital. Innovation has come to be seen asessential to a business using its intellectual capital to develop newproducts, processes and designs to achieve growth in sales and achieveand maintain a high rate of return on investment [ROI]. The process ofinnovation and the key factors for successful innovation are becomingbetter understood but the implementation and management of innovationpolicies are difficult.

[0009] What is needed is a means of evaluating innovation performance sothat progress can be tracked over time. Such a measure should not onlybe useful for managers wanting to benchmark and improve theirperformance but also for investors to use as a guide in comparing acompany to its competitors and in predicting future earnings and ROI.

[0010] It is an object of this invention to provide a measure ofinnovation capability.

BRIEF DESCRIPTION OF THE INVENTION

[0011] To this end the present invention provides for use with acomputer or a computer network, a system of measuring innovationcapability for use in managing a business or assessing valuation of abusiness consisting of

[0012] a) a survey questionnaire to be completed by a plurality ofpersonnel in the business in which groups of questions correlate withone or more of a multiplicity of factors related to innovationcapability

[0013] b) an answer database for storing and assembling answers to thequestionnaire and creating a value for each answer

[0014] c) optionally, a recommendation database of recommendations forimproving performance based on existing factor scores

[0015] d) a first algorithm for converting the sum of the answer valuesto each question into a score

[0016] e) a second algorithm for summing the scores for answers in eachgroup into a score for each innovation factor

[0017] f) a third algorithm for summing the scores of all the factorsinto a value index which is indicative of the business's potentialreturn on investment

[0018] g) a display program for presenting the values for each factorand the value index

[0019] h) and optionally a program utilising the factor scores and thevalue index for generating from said recommendation database,recommendations to management for improving the innovation capability ofthe business.

[0020] Preferably the system utilises the internet and questionnairesare answered on line. The system may be used to diagnose the innovationcapabilities of a business and to improve the innovation performance bygenerating a prioritised set of recommendations based on an analysis ofthe answers and the factor scores.

[0021] The subject of the questions constituting each innovation factorare key indicators of the effectiveness of the organisation in thefactor. When all factors are resourced adequately and managedeffectively the organisation optimises the application of assets appliedto innovation. The performance of an organisation at innovation isdependent on the effective utilisation of resources devoted toinnovation plus the effective utilisation of resources used to manageall other processes and relations within the organisation.

[0022] Preferably the first algorithm weighs the answer values ofselected questions and calculates the mean and median scores for allquestions.

[0023] The second algorithm preferably sums the weighted mean scores forquestions associated with each factor into a score for that factor

DETAILED DESCRIPTION OF THE INVENTION

[0024] This invention uses a generic open system model of businessorganisations which evaluates the six capabilities which are here calledthe foundation capabilities:

[0025] 1. General management, which integrates the other five factors

[0026] 2. Strategy for the business and competitive strategy

[0027] 3. Environmental scanning

[0028] 4. Marketing and sales

[0029] 5. Production/operations

[0030] 6. Administration including finance IT and human resources.

[0031] These capabilities overlap with each other but also operate indynamic tension because in some situations they have differing and evenopposing purposes. As conventionally practised, these capabilities donot necessarily involve innovation and may even be used to preventinnovation. Businesses That score well on these six capabilities do notnecessarily grow and achieve above average ROI. Business growth derivesfrom the creation of value through the development of new products ormethods and new business designs which are generally a result ofpurposeful innovation. To predict future earning potential it isnecessary to have an assessment of a business's innovation potential.Innovation potential depends on how well the innovation capabilities aredeveloped and managed.

[0032] This invention is partly predicated on the realisation thatinnovation capabilities are essentially subsets of the foundationcapabilities. The six innovation capabilities are:

[0033] 1. Leadership

[0034] 2. Innovation strategy

[0035] 3. Fostering innovation via the external environment whichinvolves the purposeful use of external data, relations and networks assources of ideas and innovation.

[0036] 4. Internal environment for innovation. The job designs,organisational structure decision making and reward systems that fostercreative thinking and problem solving while also providing the frameworkfor routine work processes.

[0037] 5. The innovation production process which is essentially create,capture, assess, apply. This is the process of idea generation andapplication which can be in conflict with the firm's production processbecause production focuses on efficiency and innovation focuses onadaptation

[0038] 6. Maintenance and measurement of innovation

[0039] In the context of businesses and organisations understood as opensystems the six innovation capabilities are in “natural” conflict orcreative tension with the six foundation capabilities.

[0040] The utilisation of resources for the foundation and innovationcapabilities gives an insight into the potential of a business togenerate earnings growth and above average ROI.

[0041] The preferred algorithm for determining the value index V is:

V=IR/100[w1+w2+w3+w4+w5+w6]+FR/100[W1+W2+W3+W4+W5+W6]+P[Revenue/Marketcapitalisation]

[0042] Where:

[0043] The optionally additional component P[Revenue/Marketcapitalisation] is a measure of the impact of innovative business systemdesigns on the performance of a business as such designs can have adramatic impact on ROI. P is a number between 1 and 5 derived from datacollected from the business.

[0044] w1, 2, 3, 4, 5, 6 and W1, 2, 3, 4, 5, 6 are the innovation andfoundation capabilities expressed as a weighted percentage representingthe effectiveness and impact of resource utilisation for the respectivecapability and is derived from the weighted average of a set ofquestions in the survey questionnaire.

[0045] For foundation capabilities the weightings are: W1 Management7.5%  W2 Strategy 25% W3 Environmental Scanning 2.5%  W4 Marketing 20%W5 Production 35% W6 Administration 10%

[0046] For Innovation capabilities the weightings are w1 leadership7.5%  w2 strategy 20% w3 scanning  5% w4 internal environment 20% w5innovation process 40% w6 measurement 7.5% 

[0047] I R is the % of resources devoted to innovation and is based on R& D expenditure and estimates of expenditure on other specified types ofinnovation derived fro the answers to the audit including time devotedto innovation.

[0048] F R is the % of resources allocated to foundation activities

[0049] And IR+FR=100

[0050] Additional weights Y and Z [which have empirically determinedvalues between 1 and 10] may be added to the w1 and W1 factor weights totake account of the relatively high impact of leadership and managementas a result of these functions having a coordinating and integratingrole in relation to all other functions and extraordinary effects suchas the effect of CEO departure on stock prices.

[0051] The value index measurement can be assessed at intervals of 6months or more to give an overall view of the progress of the business.

[0052] The value index can also be used to forecast Innovation PotentialRank [IPR] which is an indicator of performance two years from the timeof measurement. The forecast algorithm is based on the fact thatcompanies that currently apply more resources to innovation than theircompetitors and better manage the resources they apply will, with theexception of extraordinary events outperform their competitors in themedium term.

[0053] In order to create a score for each innovation factor and eachfoundation factor answers to sets of questions relating to each factorare scored and financial and other data on the business being measuredare collected.

[0054] Indicative questions for each factor are given below. Thesequestions are written for senior managers. Other questions are writtenso that they can be answered by any employee. Most questions are phrasedas statements that respondents rate on a scale.

[0055] Sample Questions

[0056] Management Factor

[0057] Both successful and unsuccessful projects are reviewed. Reviewsfocus on lessons that can be learned and insights gained

[0058] Across the company there is excellent communication betweentechnical/R & D personnel and commercial/marketing personnel

[0059] Managers in our company know how to set up, lead and maintaineffective teams

[0060] Leadership Factor

[0061] Managers, from the top down, draw employees' attention to thevalue of ideas, creative thinking and innovation by what they say andwhat they do

[0062] This company has enough people with the qualities required tolead innovative projects and ventures. (e.g. making things happen,handling ambiguity and uncertainty, building stakeholder support)

[0063] Strategy Factor

[0064] Our managers agree on the major opportunities, threats andconstraints facing the company in the next few years

[0065] Our managers know what our competitive advantage is and also howour core competencies underpin that advantage

[0066] Strategy for Innovation Factor

[0067] Our company's vision, value and strategy documents set out cleardemands and opportunity areas for innovative thinking and action (e.g.creating new customers, markets, products, services, ventures oralliances)

[0068] People in our company know what its main sources of growth willbe in the next few years and use this knowledge to develop and assessinnovative business cases/investment proposals

[0069] Exteral Scanning Factor

[0070] Our managers know how to assess the impacts of trends anddiscontinuities beyond the immediate industry environment (e.g. longterm technological, social trends)

[0071] Our managers and supervisors tell staff about external trends anddevelopments (opportunities and threats) and also engage them inthinking about responses.

[0072] External Environment for Innovation Factor

[0073] The company has leading edge customers and suppliers and workswith them in value creating partnerships

[0074] The company actively monitors the products, services andstrategies of competitors with a view to imitating and/or bettering them

[0075] Marketing Factor

[0076] Rate the quality and effectiveness of brand building andmanagement

[0077] Rate the quality and effectiveness of marketing and salesstrategies, plans and programs

[0078] Internal Environment Factor

[0079] Our organisational structure (reporting relations, roles,authorities, delegations) allows and encourages individuals and teams totake initiative and to try out new ideas

[0080] The company actively recognises people who find and applyvaluable innovative ideas.

[0081] Production/Operations Factor

[0082] Quality thinking and practices are embedded in the company andhelp to maintain and improve its performance

[0083] Rate the efficiency and responsiveness of production/operations

[0084] Capture, Assess, Apply Factor

[0085] Our company is know and respected for its research leadership

[0086] The company knows how and where to facilitate breakthroughthinking

[0087] Where I work there are effective ways of capturing ideas andsuggestions

[0088] I know how to use stories and metaphors to present novel ideasand proposals

[0089] Administration Factor

[0090] When I need to, I can get a rich supply of information on ourproducts, processes, projects and performance

[0091] Only reviewed, high value materials go into our online knowledgesystem.

[0092] Measurement & Maintenance of Innovation Factor

[0093] The company is developing ways to measure the value of itsintangible assets (brands, knowledge, intellectual capital, patents,etc.)

[0094] Managers and staff in the areas of accounting, personnel andfinance recognise and support the activities that foster innovation,even when additional or unusual demands are involved.

[0095] Validity Testing

[0096] Eleven organisations, seven companies and five public sectororganisations completed the WAVE audit.

[0097] The appropriate personnel—senior executives and a cross sectionof middle managers completed the questionnaires. In some cases allpersonnel from a Division of a large organisation completed the audit.

[0098] One of the limitations of the research was the small sample—onlyeleven organisations took part. Another unavoidable limitation arisesfrom the fact that one of the audit questionnaires collects data onlyfrom senior executives, and there are typically a very small number ofthese—between 4 and 20 in most companies and business units. Manystatistical tests of significance require a moderate number of responsesand the small number of responses, eg less than ten, limited the powerof the tests in some cases.

[0099] Content Validity

[0100] The conventional method for establishing content validity, iethat the instrument is measuring what it purports to measure is byliterature reviews and research analysis. In the case of WAVE extensivereviews of existing instrument measuring quality and business excellencewere conducted. The literature on innovation was also reviewed.

[0101] Construct Validity

[0102] The first three hypotheses were aimed at establishing theconstruct validity of the instrument. The tests were aimed assessingwhether expected relations between various parts of the models wereconfirmed by the data.

[0103] The first hypothesis tested was that performance on innovationactivities factors (V factors) would be lower than performance on thefoundation factors (F factors).

[0104] The test was applied to all six factor scores on both Managersand Employees data.

[0105] The rationale for the hypothesis is that companies andorganisations are better at designing and managing “Foundation”activities than “Innovation” activities because they have been doing itfor much, much longer. The management of innovation, encompassingproduct, process, R & D, and business design innovation is in itsinfancy, as a codified field of practice, and there are very fewtheories or models.

[0106] For the Managers data, many of the differences between F and Vscores for the factors were significant, with V being significantlyhigher than F scores. There were only a few cases in which the reversewas true (e.g. for some the companies on the External factor).

[0107] For the Employee data there were quite a few significantdifferences recorded, with F scores being superior to V scores for themajority of factors. There was one exception, as the mean V scores forthe External factor tended to dominate over the F scores.

[0108] Nearly all cases in which the hypothesis was not confirmedrelated to the function “External Environment” the items (questions) inthe instrument used to construct the External Environment” function wereexamined. The full description of this function is “Using sources ofideas and knowledge from the external environment, such as people innetworks that are cultivated to stimulate creative and innovativeconcepts”.

[0109] The second hypothesis was that the Managers would have higherscores on the six factors than Employees. The factor scores analyzedwere the means of both V and F items for four of the six factors.

[0110] It was expected that senior managers would give more positiveratings of performance than their subordinates on most areas measured,especially in less well managed companies.

[0111] There was good support for the second hypothesis across three ofthe four factors.

[0112] The unexpected findings on the “External environment” factor areexplained by the comment made previously.

[0113] The third hypothesis was that innovation performance over thepast three years (question 2) would be lower than overall performanceover the same period. (Question 1). It was expected that in most casesthe management of innovation would not be as strong as overallmanagement and performance.

[0114] This Hypothesis was supported in six of the eleven companies.

[0115] When analysing the data in the context of knowledge of thecompanies, it became apparent that situational factors, such as adecline or very weak improvement in performance over the previous threeyears, would limit support for this hypothesis to companies where therehad been moderate to high improvement in overall performance.

[0116] Predictive Validity

[0117] The fourth hypothesis was that Managers' expectation (question 3)of future performance based on innovation is correlated with theaggregate factor score for all of the V items, that is, the overallinnovation capabilities across the company. A significant correlationindicates that there is a relationship between Managers' expectations offuture performance and current innovation capabilities

[0118] The correlations between current innovation and futureperformance ranged from moderate to high and were significant for sevencompanies. Small sample sizes meant that results for three otherorganisations were inconclusive.

[0119] The fifth hypothesis was that composite WAVE scores (called theIndex) would indicate the future performance of profit basedorganisations. This hypothesis is the most important of all. The keytest of the accuracy of a measure is its relationship against anindependent external measure. This hypotheses could only be measuredsome time after the data was collected. The results are shown in thetable 1. TABLE 1 WAVE Audit Scores compared with actual performance oneyear later (Return on Total Assets) for 8 companies. Correlation 0.74Return on Executive Company Foundation Innovation Foundation InnovationWAVE Assets Forecast code Scores Scores Resources % Resources % INDEX00/01* Accurate? 1 64 51 0.95 0.05 6.34 1.6 Yes 2 64.8 53 0.90 0.10 6.363.1 Sample too small 3 67.5 54.5 0.95 0.05 6.69 9.9 Yes 4 70 57 0.950.05 6.94 5.9 Yes 5 66 58 0.90 0.10 6.52 10.8 Sample too small 6 67 560.95 0.05 6.65 11.5 Yes 7 73.5 67 0.80 0.20 7.22 12.6 Yes 8 75 60 0.900.10 7.35 14.7 Yes

[0120] The data collected was from both very large companies and mediumsized autonomous business units of large companies involved in diverseindustry sectors including power utilities, chemical processing, controlinstrumentation, medical instruments, banking and telecommunications.

[0121] A highly simplified version of the algorithm was used tocalculate the single figure index. The average of all foundation and allinnovation factors were multiplied by an estimate of the resourcesapplied to each. No weights or adjustments were applied.

[0122] The correlation of 0.74 obtained is considered high bystatisticians.

[0123] Despite the diverse industries and competitive conditions facedby the companies, and the simplified formula used, the WAVE measure forthese companies has a strong relationship with financial performance.

[0124] From the above it can be seen that the present invention providesa unique system for assisting businesses to improve innovationperformance and measure the performance in a way that is not onlymeaningful for managers but also for investors.

1. A method of measuring innovation capability for use in managing abusiness or assessing valuation of a business which includes thefollowing steps a) conducting a survey of managers and employees in abusiness in which groups of survey questions correlate with one or moreof a multiplicity of factors related to innovation capability b)assembling answers to the questionnaire and creating a value for eachanswer c) converting the sum of the answer values to each question intoa score d) summing the scores for answers in each group into a score foreach innovation factor e) summing the scores of all the factors into avalue index which is indicative of the business's potential return oninvestment f) utilising the factor scores and the value index togenerate recommendations to management for improving the innovationcapability of the business
 2. A method as claimed in claim 1 in whichthe innovation capabilities are leadership, innovation strategy,fostering innovation, the internal environment of organisationalstructure and reward systems, the innovation production process and themaintenance and measurement of innovation.
 3. A method as claimed inclaim 1 wherein the third algorithm for the value index V isV=IR/100[w1+w2+w3+w4+w5+w6]+FR/100[W1+W2+W3+W4+W5+W6] Where w1, 2, 3, 4,5, 6 and W1, 2, 3, 4, 5, 6 are the innovation and foundationcapabilities expressed as a weighted percentage representing theeffectiveness of resource utilisation for the respective capability andis derived from the weighted average of a set of questions in the surveyquestionnaire; I R is the % of resources devoted to innovation and isbased on R & D expenditure+NPD expenditure; F R is the % of resourcesallocated to foundation activities and IR+fr=100.
 4. A system, ofmeasuring innovation capability for use in managing a business orassessing valuation of a business, for use with a computer or a computernetwork, which includes a) a survey questionnaire to be completed by aplurality of personnel in the business in which groups of questionscorrelate with one or more of a multiplicity of factors related toinnovation capability b) an answer database for storing and assemblinganswers to the questionnaire and creating a value for each answer c)optionally, a recommendation database of recommendations for improvingperformance based on existing factor scores d) a first algorithm forconverting the sum of the answer values to each question into a score e)a second algorithm for summing the scores for answers in each group intoa score for each innovation factor f) a third algorithm for summing thescores of all the factors into a value index which is indicative of thebusiness's potential return on investment g) a display program forpresenting the values for each factor and the value index h) andoptionally a program utilising the factor scores and the value index forgenerating from said recommendation database, recommendations tomanagement for improving the innovation capability of the business.
 5. Asystem as claimed in claim 4 in which the survey is conducted over acomputer network.
 6. A system as claimed in claim 4 in which theinnovation capabilities are leadership, innovation strategy, fosteringinnovation, the internal environment of organisational structure andreward systems, the innovation production process and the maintenanceand measurement of innovation.
 7. The system as defined in claim 4wherein the third algorithm for the value index V is V=1 R/1OO[wl+w2+w3+w4+w5+w6]+F R/1 OO[W1+W2+W3+W4+W5+W6] Where w1, 2, 3, 4, 5,6 and W1, 2, 3, 4, 5, 6 are the innovation and foundation capabilitiesexpressed as a weighted percentage representing the effectiveness ofresource utilisation for the respective capability and is derived fromthe weighted average of a set of questions in the survey questionnaire;I R is the % of resources devoted to innovation and is based on R & Dexpenditure+NPD expenditure; F R is the % of resources allocated tofoundation activities And IR+FR=100.